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Top Utility Stocks to Hedge Your Portfolio

Daniel Laboe

The stock market has been on shaky ground since the drop off at the end of 2018 and with a 460 point drop in the Dow index just today. Therefore, a low beta stocks (low market correlation) with high yields might be a smart hedge for your portfolio. Utility stocks fit this profile with their low market correlation and typically larger dividend payouts. These stocks usually have a flight-to-quality classification as well – when there is a broader market sell-off investors will go to utility stocks as a high yield safe haven.

Treasury yields have been sinking since the Feds decision to hold rates steady came Wednesday afternoon. The US 10 Yr Treasury yield is down 16 basis points since Fed Chair Jerome Powell spoke on Wednesday and down 82 basis points from its high last November of 3.24%. Mr. Powell signaled that there would be no more rate hikes in 2019. The Fed also plans to slow their current portfolio runoff and completely end the quantitative tightening by October of this year. This dovish talk should cause the 10 yr yields to slide even further. These huge moves downward in the US economy’s “risk-free” bond makes high yield utility stocks look much more attractive to investors.

Here are a few utility stocks to think about adding to your portfolio:

NextEra Energy NEE

NextEra Energy is the largest public utility company by market cap in the US, operating in 27 states and 4 provinces in Canada. The company produces 46% of its energy from natural gas, 26% from nuclear, 22% from wind turbines and the remaining 6% from solar, coal and oil combined. NEE has shown a consistent top-line with expanding margins (seen in the bar chart below) that have outpaced its competitors by a considerable amount (58% gross margin).

 

 

The business is moving towards alternative power generation with plans to add around 15,000 MW by 2020 (currently producing close to 50,000 MW), in 2018 they were able to add more than 6,500 MW of renewable energy to their capacity. NextEra has numerous projects in the works including a joint venture that just received approval by the FERC called the Mountain Valley Pipeline (MVP) that will further connect their natural gas operations to the Southeast US markets.

NEE trades more like a growth stock outpacing the S&P 500 index by almost 25% in the last 2 years. This is due to expanding margins and lucrative projects that have broadened NextEra’s reach. The stock is only yielding 2.6% but with a 0.29 beta this investment option would make a great broader market hedge for your portfolio – NEE is currently a Zacks Rank #2 (Buy).

 

 

Southern Company SO

Southern Company is an Atlanta based electric utility firm that serves around 9 million customers in 9 states in the southeast. SO completed the acquisition of AGL Resources at the end of 2016 making them one of the largest utility companies in the US with a 46,000 MW capacity. This stock is boasting a similar growth story to NextEra Energy with a 27% total return over the last year, and according to Edward Jones analyst, earnings are expected to grow 5% annually for the next 5 years.

Southern Company is trading at a beta of 0.19 and boasting a 4.65% yield making it an attractive hedge for your portfolio if you believe the growth story. The company has beaten estimates for the past 8 earnings report, and analyst are still adjusting future EPS estimates up. You can see below that for the full year 2019 and full year 2020 adjusted up motivating a Zacks Rank #2 (buy).

 

 

Pacific Gas & Electric Co PCG

PG&E has been in the news quite a bit recently because of its connection with the Paradise, California wildfire that killed at least 86 people. PG&E came out to the public and said they likely caused the “campfire” that destroyed thousands of lives and became the deadliest campfire in California history. The company decided to file bankruptcy protection to itself from lawsuits. As you could probably guess the stock plummeted and is currently trading down 57% for the last 52 weeks.

 

 

I know this probably sounds like a stock you wouldn’t want to touch because of the potential liabilities involved but this could be a great buying opportunity for a stock that everyone is scared of. PG&E didn’t have any systemic changes in its operations other than increasing controls and safety measures. They have shown consistent adjusted net income growth (shown on the chart below). According to some investors, they didn’t even need to file for bankruptcy protection because they had sufficient cash flows to pay for damages.

 

 

PCG is also boasting a 20% yield because its stock dropped so much in the last 6 month. These catalysts lead me to believe this may be an excellent opportunity to get on the ground floor of an undervalued utility company that still serves 16 million Americans and not to mention a crazy high dividend yield. PCG is a Zacks Ranking #3 (Hold) at the moment.

 

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Pacific Gas & Electric Co. (PCG) : Free Stock Analysis Report
 
Southern Company (The) (SO) : Free Stock Analysis Report
 
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